telkom sa limited · 14 increased mobile opex largely in line with increased revenue mobile1...
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Telkom SA LimitedGroup annual results
Year ended March 31, 2003
An integrated communications group2
Telkom at a glanceMarch 31, 2003 Group structure
Fixed lines (000s) 4,844
Telkom Directory Services
Swiftnet
50%
Telkom
Vodacom
Mobile
Vodafone Group plc
VenFin Limited
35%
15%
100%
Fixed-line
Digitalisation (%) 99.8
Fixed-line employees1 35,361
Mobile customers (000s)
SA mobile market share (%)
8,647
57
64.9%
Shareholding Listing details
The Government of South Africa 39.3%
Thintana (SBC & Telekom Malaysia) 30.0%
Ucingo Investments 3.0%
Freefloat 27.7%
Listed on JSE and NYSE on 4 March 2002
Ticker symbol: TKG
ADR ratio 1:4
Market capitalisation: R16.2bn (US$:2.1bn)
Excludes employees of Telkom Directory Services and Swiftnet
Focused on improving returns to shareholders3
Group strategy
• Compete effectively and grow selected markets• Enhance operational and capital efficiencies• Expand integrated service offerings • Enhance employee performance• Capitalise on growing mobile communications market
Increase profitability and cash flows, reduce indebtedness, reinstate dividend payments
Increase shareholder value
Maintain market leadership positions Position the Group for competition
A year of achievement4
Key achievements
• Launch of ADSL in August 2002Increasing revenue intensity
• Vodacom and Telkom synergies frameworkSupport for long-term group strategy
• Vodacom launch of DRC in May 2002Building a base for long-term African growth
• Launch of the intercontinental submarine cable, Afrolinque, in May 2002.
• Launch of “The Agency”Support for responsible redeployment of staff
• Fixed-line cultural change programmesCreating a culture of savings and service
Solid growth balanced with increased efficiencies5
Group operational highlightsIn 2003
20.6% growthISDN channels
15.4% growthPrepaid customers
36.0% growthManaged data sites
10.4% reductionFixed-line employees1
Mobile customers2 26.0% growth
18.7% increaseMobile SA customers/employee
64.7% growthMobile SMSs
1. Excluding Telkom Directory Services and Swiftnet2. South Africa and other African Countries
A year of solid financial performance6
Group financial highlightsIn ZAR millions % change since previous year
Revenue 37,600 10.0
12,807 33.4EBITDA
6,514 55.4EBIT
292.6 33.5EPS (cents)
5,712 (36.6)Capex
20,096 (8.1)Net debt 1
Year ended March 31, 2003. 1. Net interest bearing debt net of other financial assets and liabilities
Group financials
Margin expansion and strong earnings growth8
Group income statement highlights
%20032002March 31, ZAR millions
314.0
292.61,630
17.3
6,514
34.1
12,807
37,600
28.1EBITDA margin
4.9299.3HEPS
33.5219.2EPS33.51,221Net profit
12.3EBIT margin
55.44,191EBIT
33.49,599EBITDA
10.034,197Revenue
Normalised earnings reflect strong operational performance9
Normalised earnings
-213-IPO expenditure
-98375Telcordia (incl legal and finance charges)
%20032002March 31, ZAR millions
496.7
2,767
900
(193)
1,749
119
1,630
4.91,667Headline earnings
62.4305.9Normalised EPS (cents)
62.41,704Normalised earnings
-(445)IAS 39 after 30% tax adjustment1
-107Provision for bad debts (after 30% tax)1
(73.3)446Headline earnings adjustments
33.51,221Earnings as reported
1. South African normal rate of taxation – 30%)
Revenue growth and strict cost control yield expanding margins10
Expanding group margins
14.415.9
12.3
17.3
10.8
14.4
8.7
14.7
24.7
19.2
22.5 21.9
2000 2001 2002 2003
Group Fixed-line Mobile
Year ended March 31
EBIT margin (%)
29.8
32.0
28.1
34.1
26.6
30.5
24.3
31.9
36.2
31.6
35.333.9
2000 2001 2002 2003
Group Fixed-line Mobile
Year ended March 31
EBITDA margin (%)
11
Segment contributionOperating profit contributionRevenue contribution
33.3%
66.7%
Fixed-line 4,348 79.3
Mobile 2,166 19.3
Year ended March 311. After inter-segmental eliminations
In ZAR millions % change on previous yearIn ZAR millions % change on previous year
22.3%
77.7%
Fixed-line 29,199 5.8
Mobile 8,401 27.5
1. After inter-segmental eliminations
1% decline in fixed-line opex and 23% increase in mobile opex12
Containing group operating expensesGroup operating expenses Group operating expenses contribution
In ZAR millions In ZAR millions % change from previous year
23,205
26,368
31,08630,006
2000 2001 2002 2003
3.6%
25.2%
8.1%
20.1%
3.8%
19.7%
23.0%Employee expenses: 7,208 0.6
Depreciation & amortisation: 6,293 16.4
Operating leases: 1,205 (1.0)
Services rendered: 2,541 15.8
SG&A: 7,888 (6.1)
Payments to operators: 6,185 7.3
Year ended March 31, 2003. Excluding other income of R234 millionYear ended March 31. Includes other income
Increased efficiencies and strict cost control reduce fixed-line opex13
Fixed-line operating expensesEmployee expenses Payments to operators SG&A
In ZAR millions In ZAR millionsIn ZAR millions
6,759 6,726
2002 2003
0.5%
Year ended March 31. Before inter-segmental eliminations.
4,650
3,312
2002 2003
28.8%6,611 6,698
23.622.6
2002 2003
Employee expenses as % revenue
Increased mobile opex largely in line with increased revenue14
Mobile1 operating expenses
568509
7.0
5.1
2002 2003
Employee expenses as % revenue
Year ended March 31. 1. 50% of Vodacom’s operating expenses. Expense categories differ from those presented by Vodacom. Before inter-segmental eliminations.
689
1,109
2002 2003
61.0%
3,688
4,614
2002 2003
25.1%
Payments to operators SG&AEmployee expensesIn ZAR millions In ZAR millionsIn ZAR millions
Strong free cash flows to support debt reduction15
Group cash flow highlights
%20032002March 31, In ZAR millions
4,017
837
(3,026)
5,671
5,731
12,063
9,748
(38.0)9,250Investing activities
-(1,079)Free cash flow
-(98)Net cash
-66Financing activities
(37.0)9,004Additions to PPE
4.111,583Cash generated from operations
19.38,171Operating activities
Balancing growth investment with stringent investment criteria16
Reduced capital investmentFixed-line capital expenditure Mobile capital expenditure
8,468 8,297
4,013
6,962
35.5%
31.4%
24.9%
13.5%
2000 2001 2002 2003
Capex to revenue
R5.0bn budget
for 2004
993
1,5921,699
2,042
20.7%24.0% 25.3%
17.2%
2000 2001 2002 2003
Capex to revenue
Year ended March 31. 50% of Vodacom, excluding intangiblesRevenue before inter-segmental eliminations
R1.4bn (50% of
Vodacom’s) budget
for 2004
In ZAR millions In ZAR millions
Year ended March 31
Strengthened balance sheet17
Group balance sheet highlights
(11.6)34,61239,136Total liabilities
(11.7)22,41725,401Total debt
(8.1)20,09621,858Net debt2
109.5129.9Net debt to equity ratio
9.018,34816,832Capital and reserves
11.87.8Return on assets1
%20032002March 31, In ZAR millions
53,154 (3.7)55,208Total assets
1. Operating profit after 30% taxation (SA normal taxation), before interest on average total assets (excluding financial assets), excluding non-interest bearing liabilities
2. Total interest-bearing debt net of cash and financial assets and liabilities
Balanced debt profile18
Group debt profileGroup total debt ageing Currency profile
Local: 17,114 77.3% Foreign: 5,023 22.7%
In ZAR millions contribution
4,693
5,173
1,553
4,576
5,429
4,682
2004 2005 2006 2007 2008 2008thereafterYear ended March 31.
TL03, Sep- 03,
R4,3bn YTM-
10 to 11%
TL08, May-
04, R3.4
YTM-17.3%
In ZAR millions
Fixed v Floating
Floating: 2,133 9.6% Fixed: 20,004 90.4%
In ZAR millions contribution
Year ended March 31, 2003. Total debt excluding credit facilities utilised
Dividend scheduled to be reinstated for the year ended March 200419
Delivering on financial objectives
Capex reduction
Margin expansion
Increased free cash flow
1. Exclude other financial liabilities
Group EBITDA margin 34.1%
Group EBIT margin 17.3%
Group Capex to revenue 15.2%
Group capex R5,7bn
Free cash flows of R4,0bn
EPS growth of 33.5%
Debt repayment of R2.4bn1
Fixed-line operational review
Solid growth balanced with increased efficiencies21
Fixed-line financial highlightsIn ZAR millions % change since previous year
Revenue 29,635 5.9
4,348 79.3EBIT
4,013 (42.4)Capex
21,173 (11.2) Total debt1
% in 2003 % in previous year
EBITDA margin 31.9 24.3
13.5 24.9Capex to revenue
Fixed-line segment, before inter-segmental eliminations with mobile segment1. Total debt for Telkom Company only
Increasing profitability of customers and revenue potential of customers22
Improving the quality of our customer basePrepaid customers (000s) ISDN Channels (000s)
Year ended March 31
467
563
2002 2003
20.6% 4,7294,989
2002 2003
Revenue per line1 (ZAR)
5.5%
708
817
2002 2003
15.4%
1. Excluding data and directories and other services revenue
Telkom is becoming a trusted data service partner23
Data volumes providing growthData revenue (Rm)
2,764
3,328
4,507
3,913
2000 2001 2002 2003Year ended March 31Fixed-line data revenues before inter-segmental eliminations with Vodacom
15.2
Number of managed network sites
36.0
3,138
4,634
7,729
5,684
2000 2001 2002 2003
Number of sitesIn ZAR millions
Year ended March 31
Great improvements in customer service24
Customer service remains top priority
0.4
3
2002 2003
15
31
2002 2003
7
14
2002 2003
Mean time to repair
corporate voice improved
by 50% to 7 hours
Mean time to install ISDN
improved by 52% to 15
days
Mean time to install
corporate voice improved
by 87% to 0.4 hours
Year ended March 31
Creating awarenes of fixed-line price competitiveness25
Keeping prices competitive
13.2
9.2
6.95.8
2.7 2.7
7.7
1997 1998 1999 2000 2001 2002 2003
Tariff rebalancing largely completed over 5 years
period ending 2002 in preparation for competition.
Ratio of local call prices to long distance now in line
with best practice
Local and long distance calls are the
cheapest in the South African market
Standard time
Callmore time
Local (0-50km)
1 R0.37/min R0.14/min
Long distance(>50km)
1 R0.99/min R0.50/min
Mobile R1.88/min R1.11/min
Year ended March 31. Note: 3-minute local call to 3 minute long distance call (>200 km) Rates as of 1 January 2003 and include VAT. 1. After 1st unit.
26
Protecting our core revenues
Real price reductions
Volume discounts
Long-term contracts
Value-added products
4,507
1,2841,773
7,539
5,616
4,595
3,562
Data ILD DLD Interconnect F-M Local Subs
Risk of competitionHigh LowYear ended March 31, 2003. Fixed-line revenues (ZARm), before inter-segmental eliminations with Vodacom. ILD – International Long Distance; DLD – Domestic Long Distance
Tariffs rebalanced
Price promotions
Cable investments
African hubbing
SNO services
New mobile interconnect
Prepaid growth
Value-added services
Tariffs rebalanced
Call packages
Responsibly reducing employees27
Streamlining the company
Fixed-line employee numbers1 Employee losses over last 4 yearsContribution to gross employee losses1 (%)
49,128
43,758
35,36139,444
2000 2001 2002 2003Year ended March 31.1. Excludes employees of Telkom Directory Services and Swiftnet.
10.4%
Natural attrition: 34.7%
Outsourcing: 10.5%
Involuntary reductions: 6.3%
Early retirement: 18.3%
Voluntary severance: 30.2%
4 years from 1 April 1999 to March 20031. Gross staff losses before appointments of 31,439
28
Creating a cost conscious culture
2,0931,932
7.5
6.5
2002 2003
Materials & maintenance as %revenues
812
491
2.9
1.7
2002 2003
Bad debt write-off as % revenues
2,244 2,241
2002 2003
Materials and maintenance (ZARm)
Year ended March 31. Before inter-segmental eliminations. 1. Bad debt write-off against provision.
7.7%
Bad debts (ZARm)1 Outsourced contracts (ZARm)1
Flat
1. Property management and operating leases costs
Mobile operational review
Leadership in financial performance30
Vodacom1 financial highlightsIn ZAR millions % change since previous year
Revenue 19,779 22.5
4,330 19.6EBIT
3,399 (20.6)Capex
EBITDA margin 33.9 35.3
% in 2003 % in previous year
17.2 26.4Capex to revenue
33.6 65.4Net debt to equity
1. 100% of Vodacom (Telkom consolidates 50%)
Customer growth supports forecast increased penetration in SA31
Continued strong customer growth in South AfricaVodacom South African customers (000s) South African mobile market share
Number of customers (M): market share (%)
3,069
5,108
7,874
6,557
2000 2001 2002 2003
20.1% MTN: 4.8 35Vodacom: 7.9 57
Cell C 1.1 8
Vodacom estimatesYear ended March 31
Increasing the value of our contract customers32
Stabilising mobile ARPUsSA contract churn (%)SA contract ARPU’s (ZAR)
12.3%
560
629
2002 2003
Vodacom SA ARPU (ZAR)
182 183
2002 2003
0.5%14.5
11.9
2002 2003
17.9%
Year ended March 31 Year ended March 31Year ended March 31
Launch of MyLife in October 2002 to support future data growth33
Strong mobile data growthVodacom data revenue Number of SMSs
In ZAR millions Millions
1,500
911
2002 2003
64.7%
581
400
2002 2003
45.3%
Year ended March 31.1. 100% of Vodacom (Telkom consolidates 50%)
Year ended March 31
Combatting margin pressure with improved productivity34
Improving productivity
36.2
32.035.6 34.9
24.7
19.723.0 23.4
2000 2001 2002 2003
EBITDA % EBIT %
SA customers per employee
Year ended March 31
Vodacom SA profitability margins (%)
Year ended March 31
18.7%
758
1,245
2,017
1,699
2000 2001 2002 2003
Creating a base for longterm growth35
Expansion beyond South Africa
38184
1,235
741
2000 2001 2002 2003
• 447,438 customers• Estimate market share: 53%• ARPU: USD 22• Employees: 224
• 77,474 customers• Estimate market share: NA• ARPU: ZAR 104• Employees: 74
• 247,909 customers• Estimate market share: 44%• ARPU: USD 20• Employees: 204
Other African revenue (ZARm)1
Tanzania
DRC
Lesotho
66.7%
Year ended March 31. 1. 100% of Vodacom – Telkom consolidates 50%
Conclusion
Adapting to new trading challenges37
Recent developments
• Wage settlement9%, 8%, 7% for years ending March 04, 05, 06 respectively
• Change in inflation• Decline in interest rates
Impact on future tariffs, operating profits Benefit on refinancing of debt, consumer spend
• Competition in fixed-lineTwo bidders short-listed
• RegulatoryPrice of 1800mhz spectrum determined
Well positioned to deliver on short to medium term targets38
Outlook
Customer service
Efficiencies
Debt reduction
Short-termfocus
Fixed-mobile synergies
African growth
Carrier of choice
Long-termfocus
39
Forward-looking safe harbourAll statements contained herein, as well as oral statements that may be made by Telkom SA Limited or by officers, directors or employees acting on behalf of the Telkom Group, that are not statements of historical fact constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, specifically Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Such forward-looking statements involve a known and unknown risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. Among the factors that could cause our actual results or outcomes to differ materially from our expectations are those risks identified under the caption “Risk Factors” contained in the prospectus relating to Telkom’s initial public offering filed with the U.S. Securities Exchange Commission and available on Telkom’s website at www.telkom.co.za/ir, including, but not limited to, increased competition in the South African fixed-line and mobile communications markets; developments in the regulatory environment; Telkom’s ability to reduce expenditure; the outcome of arbitration or litigation proceedings, including with TelcordiaTechnologies Incorporated; general economic, political, social and legal conditions in South Africa and in other countries where Vodacom invests; fluctuations in the value of the Rand; and other matters not yet known to us or not currently considered material by us. You should not place undue reliance on these forward-looking statements. All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Moreover, unless we are required by law to update these statements, we will not necessarily update any of these statements after the date of this press release, either to conform them to actual results or to changes in our expectations.
Investor [email protected]
Tel: +27 12 311 5720Fax: +27 12 311 5721
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